The global delivery model seems to be working for Indian software companies and the offshore outsourcing phenomenon is into episode two. At the same time, the domestic market for software services is burgeoning as India Inc starts adopting IT with a vengeance, says Venkatesh Ganesh.
What started out as a backlash against outsourcing in early 2004 turned out to be just a pbutting phase for Indian software. That said, the ground realities remain the same. US companies continued to outsource with the same fervour as before. According to Nbuttcom, IT services and software exports grew by 33% in FY 2003-04 clocking revenues of $12.8 billion.
Nbuttcom predicts that the IT services and software exports industry is likely to grow 35% to touch $17.5 billion in FY 2004-05. Custom application development and maintenance account for approximately half of India's IT services exports.
The IT consulting front saw some action as a host of Indian majors started beefing up their capabilities in this area. Margins are typically higher in consulting-compared to $20 per hour in vanilla services, rates in consulting are upwards of $100 per hour. Infosys Technologies has spent $20 million setting up a business consulting subsidiary in the US. Similarly, TCS acquired Aviation Software Development Consultancy India (ASDC), a company focussed on providing consulting and solutions to the aviation industry. Meanwhile, Wipro's process consulting practice has grown. Process consulting is part of Wipro's IT consulting practice. The company offers services such as business process improvement and Six Sigma consulting. The process consulting division generated revenues of $20 million during the first nine months of the current fiscal, 2004-05 compared to $10 million for 2003-04.
Size does matter
While the Indian software services sector is booming thanks to the offshore wave, many small and mid-sized Indian organisations do not want to repeat the mistakes of the past. Consequently, Tier 2 companies such as MphasiS and Geometric Software have gone in for acquisitions.
MphasiS was the most aggressive player in the mid-tier acquiring two companies in 2004. With the intent of penetrating the healthcare and telecom verticals, the company acquired Kshema Technologies for $21 million. Subsequently, it acquired the SAP implementation practice of MIRC Electronics. It followed this up by sewing up a deal to acquire Princeton Consulting, a London-based consulting company.
The burgeoning demand for SAP services can be seen from two deals last year. In addition to the MphasiS deal, Cognizant Technology Solutions acquired Ygyan Consulting, a Pune-based SAP services provider. With the Ygyan acquisition, Cognizant brought 85 SAP consultants on board. Similarly, Geometric Software signed an agreement with OnCourse Technologies Inc to acquire Teksoft Inc and Cimtronics Inc for $1.75 million. i-flex Solutions acquired the US-based BPO firm, Equinox Corp and obtained a stake in French software company, Login SA for $5 million.
Remote infrastructure management and offshore product development have emerged as promising lines of business.
Be careful not to call it outsourcingMarch 21, 2005 When Ramnath Reddy uses the word outsourcing, his colleague Michael Fernandes quickly corrects him. We're sitting around a coffee table in the lobby of the Fairmont Copley Plaza hotel, during a biotechnology...
Remote infrastructure management
This opportunity has been valued at $111 billion (Source: Forrester Research) that has not been tapped by most Indian companies. Indian firms are taking a shot at this market approaching this space in the same way that they approached the software services market-start by offering on-site support and, once the client is confident of capabilities, move work offshore. TCS, Wipro, Infosys, Patni and Cognizant are competing with established vendors such as IBM and EDS in this space.
Looking beyond
Indian firms have also started looking beyond the US market for growth. For example, the German IT services market is worth 26.5 billion euros. The opportunity is huge as only 2.8% of India's software exports are to Germany. Companies such as Hexaware have been quick to spot this opportunity. Of the 25% revenues from the European market in the first half of 2004, 15 to 20% was contributed by the company's German unit. Currently, Hexaware has clients such as Citibank, Lufthansa Systems and Deutsche Leasing in Germany.
The domestic market
The domestic market was considered to be the weak link for Indian software companies. That's all changed. Indian software services players had focussed on export opportunities due to the lack of a strong domestic market.
As outsourcing deals materialise, and big ones at that, India is becoming a market that cannot be ignored. For the record, Bharti Telecom signed a record $750 million contract for 10 years with IBM wherein the latter would manage Bharti's entire IT infrastructure. This agreement follows two other major outsourcing deals-Hewlett-Packard Services with Bank of India, and Dabur with Accenture. Recently, Wipro bagged a total outsourcing deal with Yes Bank.
Product play
As the software services game becomes a volume play, smaller vendors are looking at creating Intellectual Property (IP). While India's expertise in software services is well known, some mid-sized firms are dominating the product space. India has product firms in almost every category be it ERP, CRM, accounting or even remote infrastructure management.
Indian vendors have also been smart enough to develop expertise in niche verticals such as telecom fraud management. For example, Subex started by developing a product in the niche domain of fraud management for telecom operators. Its clientle includes top names such as Bharti, Hutch and Reliance.
ITeS set to grow
The Indian ITeS-BPO sector continued to record dizzying growth rates. According to Nbuttcom, total revenues earned by the Indian ITeS-BPO industry grew by 45.3% from $2.7 billion in FY 2002-03 to $3.9 billion at the end of FY 2003-04. Nbuttcom predicts that the industry will grow approximately 44.4% and reach $5.7 billion by the end of FY 2004-05.
While existing players are trying to expand their services portfolio, smaller BPO firms have realised that they need to focus on niche markets. For instance, Ugam Solutions started its BPO operations by concentrating on high-end data analytics.
